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Swathmore Clothing Corporation grants its customers 30 days’ credit. The company uses the allowance method for...

Swathmore Clothing Corporation grants its customers 30 days’ credit. The company uses the allowance method for its uncollectible accounts receivable. During the year, a monthly bad debt accrual is made by multiplying 2% times the amount of credit sales for the month. At the fiscal year-end of December 31, an aging of accounts receivable schedule is prepared and the allowance for uncollectible accounts is adjusted accordingly.

At the end of 2020, accounts receivable were $610,000 and the allowance account had a credit balance of $74,000. Accounts receivable activity for 2021 was as follows:

Beginning balance $ 610,000
Credit sales 2,800,000
Collections (2,663,000 )
Write-offs (57,000 )
Ending balance $ 690,000

The company’s controller prepared the following aging summary of year-end accounts receivable:

Summary
Age Group Amount Percent Uncollectible
0−60 days $ 460,000 4 %
61−90 days 78,000 15
91−120 days 67,000 26
Over 120 days 85,000 41
Total $ 690,000

Required:
1. Prepare a summary journal entry to record the monthly bad debt accrual and the write-offs during the year.
2. Prepare the necessary year-end adjusting entry for bad debt expense.
3-a. What is total bad debt expense for 2021?
3-b. How would accounts receivable appear in the 2021 balance sheet?
  

Solutions

Expert Solution

Q1.Journal entries to record the monthly bad debt accrual and the write-offs during the year:

Particulars Debit amount($) Credit amount($)

1.Bad Debts expense a/c (2,800,000*2%)

To Allowance for uncollectible accounts

(Entry for monthly bad debts accrual)

56,000

56,000

2. Allowance for uncollectible accounts

To Account receivable a/c

(Write offs recorded)

57,000

57,000

Q2. Next, we need to record the necessary year-end adjusting entry for bad debt expense:

For that we need to calculate the bad debts expense amount:-

Age Group Amount($)(a) Percent Uncollectible(b) Estimated bad debts(a*b)($)
0−60 days 460,000 4 18,400
61−90 days 78,000 15 11,700
91−120 days 67,000 26 17,420
Over 120 days 85,000 41 34,850
Total $690,000 $82,370

Now, adjustment entry for bad debt expense-

Particulars Debit amount($) Credit amount($)

1. Bad debts expense a/c (wn.1)

To Allowance for uncollectible accounts

( Bad debts expense recorded)

$9,370

$9,370

Working notes:-

1. Bad debts expense amount= Total Estimated bad debts- [ Credit balance of allowance account+ Bad debts accrual] + Write offs

=$82,370-[ $74,000+ $56,000]+ $57,000= $9,370

Q3. (a) We have to ascertain total bad debt expense i.e is equal to = $56,000+ $9,370= $65,370

(b) For this, we have to prepare the Balance sheet for 2021:

Swathmore Clothing Corporation

Balance Sheet (2021)

Current Assets:
Account receivable $690,000
less:Allowance for uncollectible accounts ($82,370)
Net Account receivable- $607,630

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